On 11 July 2023, HM Treasury published its response to the call for evidence on the UK Short Selling Regulation (SSR). As well as summarising responses received to the call for evidence published on 9 December 2022 as part of the Edinburgh Reforms, HM Treasury’s response sets out the next steps for replacing the SSR with a UK-tailored regulatory regime for short selling, including key changes to short selling disclosure requirements.

Response to the call for evidence

The call for evidence was the first step in the government’s review of short selling as part of its programme to repeal retained EU law in financial services and replace it with a regulatory framework tailored to the UK. It sought views on the current functioning of the UK SSR and how it might be better tailored to the UK markets.

In its response to the call for evidence, HM Treasury confirms that it will give the FCA rule-making powers to deliver the firm-facing aspects of the new UK short selling regime. When the FCA consults on a short selling regime to replace the UK SSR, it will take responses to the call for evidence and the views of the government, as set out in the response document, into account. This approach is intended to ensure that the UK has an agile and internationally respected short selling regime that supports a thriving, internationally competitive financial services sector, contributing to the UK’s economic growth while providing appropriate safeguards.

Based on the feedback it received to the call for evidence, HM Treasury is also making two key changes aimed at improving the UK’s short selling regulatory framework. These are:

  • Replacing the current public disclosure regime based on individual net short positions with an aggregated net short position disclosure regime.
  • Increasing the current disclosure threshold for net short position reporting to the FCA from 0.1% to 0.2%.

These changes are intended to ensure that the UK’s regulatory framework for short selling supports effective market functioning, with appropriate protections for investors and without placing a disproportionate burden on industry.

Further SSR consultation

Alongside the response to the call for evidence, HM Treasury also published a further consultation on sovereign debt and credit default swaps. While the call for evidence focused on the equity-related aspects, the UK SSR also contains provisions on sovereign debt issued by the UK (sovereign debt) and UK credit default swaps which relate to UK issued sovereign debt (CDS). The government said in the call for evidence that it would separately consider sovereign debt and sovereign debt CDS, and this consultation is focused specifically on short selling in sovereign debt markets.

The consultation seeks views on proposals to delete the aspects of the short selling regime related to sovereign debt and credit default swaps, as part of the government’s work to replace the SSR with a UK-tailored regulatory regime. It proposes to remove the requirements currently placed on investors when taking out short positions in sovereign debt or sovereign CDS, and the related reporting requirements.

Under the government’s proposed approach, sovereign debt and CDS would be kept in scope of the FCA’s emergency intervention powers. In practice, this means that in future the UK’s short selling regime will focus on equities, with the FCA keeping its ability to intervene in exceptional circumstances for a broader range of financial instruments, including sovereign debt and CDS. The government’s view is that this approach will not in any way impact market integrity or financial stability, while reducing burdens for market participants.

The consultation closes on 7 August 2023.